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European equities

UK banks are alive and kicking

Analysts’ questions are now much more focused on the business of banking, such as volumes, margins and provisioning rather than on the litany of conduct charges and regulatory changes that we have endured for the last five years or more.

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Rob James, financials analyst and co-manager of the Old Mutual Financials Contingent Capital Fund at Old Mutual Global Investors, reflects on the recent reporting season for UK banks.

It’s refreshing to see that the bank sector is returning to some form of normality.

Analysts’ questions are now much more focused on the business of banking, such as volumes, margins and provisioning rather than on the litany of conduct charges and regulatory changes that we have endured for the last five years or more.

This is, of course, very good news for investors in the sector. With the drain of fines finally easing, the underlying profitability of the sector is becoming more obvious. For sure, we’re not completely out of the woods yet, as we saw with Lloyds Bank’s topping up its PPI claim provisioning in the quarter, but we’re so much closer to the end now. We’ve also cleared another couple of hurdles with both RBS and HSBC agreeing settlements with the Department of Justice in the US.

The downward pressure on interest rates brought about by quantitative easing (QE) has been another impediment to profits. While this was a necessity for economies during the financial crisis, it severely hit the sector’s ability to generate interest income, and therefore profits. At long last QE is, or is close to, being wound down. There is also upward pressure on interest rates as demand mops up slack in the economies, pushing up inflationary expectations.

This means that many of the headwinds over the last few years are finally coming to an end, and are turning into tailwinds for the banks.